The UK Election Will Dominate Market Price Action

The UK election overshadows high frequency readings of the economy. The week ahead features the PMI reports for April. With the Conservatives and Labor running close, and neither with a majority, a coalition will likely be necessary. Data is one the light side. Attention will be on the April Markit PMI surveys for the construction and service sectors which are scheduled to be released on Tuesday and Wednesday, respectively. The construction and services sectors should not prove to be as sensitive to the recent strength of sterling against the euro as the manufacturing sector has.

The UK election on Thursday brings uncertainties for UK investors. Polls have consistently put the right-leaning Conservative Party in the lead, but, with 269 seats projected to be won by the Guardian’s poll- projector, falls a long way short of the 326 seats needed to form an outright majority. The combined support of the Conservatives and Liberal Democrats, which form the current coalition government, is projected at just 302, while the combined support of the left-leaning Labor and the Scottish Nationalist Party is 323.

The general view is that an alliance of more than 322 MPs could probably survive a confidence vote, but the fact is that the UK is heading for weak government. The central possibilities are either a Conservative dominated government, which would put a referendum on EU membership on the agenda in 2017, and thereby herald uncertainty for businesses and a probable boost for the Scottish independence movement or a Labor dominated government, which has plans to restructure British capitalism. The most market friendly outcome would be a Conservative-led government, though this looks unlikely. An added uncertainty is that the main parties have been avoiding declarations of coalition commitments, instead focusing last-minute campaigning on undecided voters.

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